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Raymond James Q1 2022 Earnings Call Transcript


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Participants

Corporate Executives

  • Kristie Waugh
    Senior Vice President of Investor Relations
  • Paul Reilly
    Chairman and Chief Executive Officer
  • Paul Shoukry
    Chief Financial Officer

Presentation

Operator

Good morning and welcome to the Raymond James Financial First Quarter Fiscal 2022 Earnings Call. [Operator Instructions]

Now, I will turn it over to Kristie Waugh, Senior Vice President of Investor Relations at Raymond James Financial.

Kristie Waugh
Senior Vice President of Investor Relations at Raymond James

Good morning, everyone and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer and Paul Shoukry, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James' Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to Slide 2, please note certain statements made during the call may constitute forward-looking statements. These statements include but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipating timing and benefit of our acquisitions including our acquisition of Charles Stanley Group plc completed on January 21st, 2022 and our proposed acquisition of TriState Capital Holdings, as well as our level of success in integrating acquired businesses, anticipated results of litigation and regulatory development, impacts of the COVID-19 pandemic or general economic conditions.

In addition, words such as may, will, should, could, scheduled, plan, intend, anticipate, expect, believe, estimate, potential or continue or a negative of such terms or other comparable terminology, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our Investor Relations website.

During today's call, we will use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation.

With that, I'm happy to turn the call over to Chairman and CEO, Paul Reilly. Paul?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Good morning and thanks for joining us today. Although our [Indecipherable] were slow out of the gate last Sunday against some very strong competition not so for Raymond James as we are off to a fantastic start. It's hard to believe the pandemic started in the US nearly 2 years ago. When I think back on all of this has been accomplished since then, I'm so proud of the way our associates and advisors have continued to serve their clients with great care and compassion, living out our values, each and every day.

Beginning on Slide 4, our steadfast commitment to serving clients resulted in fantastic financial results during the quarter, starting off fiscal 2022 with record quarterly revenues and earnings that were propelled by record investment banking revenues and record asset management and related administrative fees in the Private Client group. In the fiscal first quarter, the firm reported record net revenues of $2.8 billion and record net income of $446 million or earnings per diluted share of $2.10, a 42% increase over diluted EPS in the fiscal first quarter of 2021. Excluding $6 million of acquisition related expenses, quarterly adjusted net income was $451 million or earnings per diluted share of $2.12.

Annualized return on equity for the quarter was 21.2% and adjusted annualized return on tangible common equity was 23.7%, a very impressive result especially in this near zero rate environment and given our strong capital positions.

Moving to Slide 5, we ended the quarter with record total client assets under administration of $1.26 trillion, up 23% year-over-year and 7% sequentially. We also achieved record PCG assets and fee-based accounts of $678 billion up 8% sequentially. Record clients' domestic cash sweep balances of $73.5 billion and record financial assets under management of $203 billion. Through our client-focused culture and leading technology solutions, we maintain our focus on supporting advisers and their clients. As a result, we continue to see strong results in terms of adviser retention, as well as record results in recruiting new advisors to the Raymond James platforms through our multiple affiliation option.

Over the trailing 12-month period ending in December 31, 2021, we recruited financial advisors with nearly $350 million of trailing 12 production and approximately $56 billion of client assets to our domestic independent contractor and employee channels. Additionally, we generated domestic PCG net new assets of approximately $104 billion over the four quarters ending in December 31, 2021, representing more than 11% of domestic PCG assets at the beginning of the period.

First quarter domestic PCG net new asset growth was even stronger, generating nearly 14% annualized rate, the highest level we have experienced that starting to closely track this metric. These results really highlight our industry leading organic growth. We ended the quarter with 8,464 financial advisers, a net increase of 231 over the prior year period and a net decrease of 18 compared to the preceding quarter. As many of you know in the last calendar quarter, we generally see an elevated number of retirements in advisers choosing to leave the business and it was no different this year with approximately 90 advisers falling into that category.

However, when advisers retire, they typically have succession plans and assets are usually retained by the firm, so there is minimal impact to the production or asset levels. Clients domestic cash sweep balances grew 10% sequentially to a record $73.5 billion. As Paul will detail later in the call, we should have significant upside to our pre-tax earnings in a rising interest rate environment. Also worth noting on this slide is the impressive loan growth at the Raymond James Bank during the quarter, up 5% sequentially to a record $26 billion. This growth was driven by securities-based loans to PCG client, as well as a strong corporate loan growth.

Moving to the segment results on Slide 6. The Private Client Group generated record quarterly net revenues of $1.84 billion in pre-tax income of $195 million. Given the timing of certain expenses, we think it is most appropriate to compare the year-over-year results where the segment's revenues increased 25% and the pre-tax income increased 39% over the first fiscal quarter of 2021, truly fantastic growth.

The Capital Markets segment generated record quarterly net revenues of $614 million and record pre-tax income of $201 million, representing an impressive 33% pre-tax margin to net revenues. These record results were driven by record investment banking revenues including records for both M&A and Equity underwriting. Fixed income also generated solid results for the quarter.

The Asset Management segment generated net revenues of $236 million and pre-tax income of $107 million. On a year-over-year basis, revenues grew 21% and pre-tax income grew 29% over the first fiscal quarter of 2021, primarily driven by higher assets under manner. Paul will discuss some of the sequential variances in the segment later on the call.

Raymond James Bank generated quarterly net revenues of $183 million and pre-tax income of $102 million, representing solid sequential and year-over-year growth. Net revenue growth was largely due to higher asset balances as the bank generated attractive growth in its securities based lending portfolio up an astonishing 44% over December of 2020, in addition to the growth in the residential mortgages and corporate loans.

Pre-tax income growth was due to the aforementioned revenue growth and a bank loan loss release in the current quarter compared to a provision for credit losses in the comparative period, as macro economic conditions continue to improve. These record results reinforce the value of our diverse and complementary businesses.

Before I hand the call over to Paul, I'll take a moment to highlight the completion of the acquisition the U.K. based Charles Stanley Group earlier this month. Charles Stanley adds approximately $36 billion of client assets bringing Raymond James total client assets to the UK to approximately $57 billion. We have long admired this firm and we are pleased to welcome Charles Stanley to the Raymond James family. And now for a more detailed review of our first quarter financial results, I'll turn the call over to Paul Shoukry. Paul?

Paul Shoukry
Chief Financial Officer at Raymond James

Thanks, Paul. I'll begin with consolidated revenues on Slide 8. Record quarterly net revenues of $2.78 billion grew 25% year-over-year and 3% sequentially. Record asset management fees grew 1% over the preceding quarter. I do want to touch on the 1% sequential decline of asset management fees in the Asset Management segment during the quarter, primarily due to a larger portion of certain client fees allocated to the Private Client Group segment, starting at the beginning of the fiscal year, which effectively resulted in nearly $9 million of managed account fees that shifted from the Asset Management segment to the Private Client Group segment during the quarter.

This change is the primary driver of the Asset Management segment's revenues and pre-tax income declining sequentially. Private Client Group assets in fee-based accounts were up 8% during the first fiscal quarter, providing a nice tailwind for this line item for the second quarter of fiscal 2022. But there are fewer days in the fiscal second quarter, so I expect somewhere around 5% to 6% sequential growth in this line item in the second quarter.

Consolidated brokerage revenues of $558 million grew 6% over the prior year and 3% sequentially, with 12% year-over-year growth in the Private Client Group segment and sequential growth in the Private Client Group segment and the Capital Markets segment. Account and service fees of $177 million increased 22% year-over-year and 4% sequentially, largely due to higher mutual fund in annuity services fees, as well as client account fees in the Private Client Group segment.

Paul already discussed our record investment banking results this quarter, so I'll touch on other revenues. Other revenues of $51 million were down 31% compared to the preceding quarter, primarily due to lower tax credit funds revenues which are typically highest in the fiscal fourth quarter. Gains on private equity investments also declined on a year-over-year and sequential basis.

Moving to Slide 9, client domestic cash sweep balances ended the quarter at a record $73.5 billion, up 10% over the preceding quarter and representing 6.5% of domestic PCG client assets. This growth in client cash balances should bode well for us in a rising interest rate environment, which I will describe in more detail on the next slide.

Turning to Slide 10. Combined net interest income and BDP fees from third party banks was $205 million, up 3.5% from the preceding quarter. This growth is largely attributable to strong asset growth and a resilient net interest margin at Raymond James Bank, which held flat at 1.92% for the quarter. Average yields on the bank loan portfolio actually increased slightly this quarter, which was fantastic to see. However, an increase in lower yielding cash balances kept the bank's net interest margin flat. We expect the bank's NIM to remain relatively stable at current interest rate and we expect a nice tailwind for net interest income going into the next quarter, given the strong growth of loans at Raymond James Bank. But net interest income will also be impacted by fewer days in the fiscal second quarter.

Related to loans, based on your feedback, we have added ending period loan balances by category in our supplemental earnings schedule. We hope you find this update helpful and as always thank you for your suggestions to continue enhancing our disclosures. The average yield of RJBDP balances with third party banks take lower to 28 basis points in the quarter, reflecting the low interest rate environment and a limited demand for cash from third party banks.

I want to provide an update to the interest rate sensitivity from what we provided last May during our Analyst and Investor Day. As of December 31st, clients' domestic cash sweep balances were $73.5 billion. Given our high concentration of floating-rate assets that are funded with these cash balances, we should have significant upside from increases in short-term interest rates.

Using the static balances and a instantaneous 100 basis point increase in short-term interest rate, we would expect incremental pre-tax income of approximately $570 million per year, with approximately 65% of that reflected as net interest income and 35% reflected as account and service fees. This scenario assumes a blended deposit beta of around 15% for the first 100 basis point increase, commensurate with what we experienced in the last rate cycle.

Moving to consolidated expenses on Slide 11, first, our largest expense compensation. The compensation ratio for the quarter of 67.7% was well below our 70% target and close to the compensation ratio we achieved in fiscal 2021 helped by record investment banking revenues. As explained on our prior calls, while our compensation ratio target is 70% or lower in this near zero short-term interest rate environment, we have demonstrated we can manage below that target closer to 67% to 68% when the Capital Markets segment generate at/or near these record levels of revenues.

And of course, we'll likely have to revisit this target if interest rates start increasing. Non-compensation expenses of $339 million decreased 6% sequentially, primarily driven by the bank loan loss reserve release this quarter, as well as lower professional fees. As you can see in these results, we have been very focused on the disciplined management of all compensation and non-compensation related expenses, while still investing in growth and ensuring very high service levels for advisers and their clients.

However, as we discussed last quarter, we expect expenses to increase throughout this fiscal year, as we continue investing in people and technology to support our tremendous growth as business development expenses increased with travel and conferences resuming and as net loan growth drives higher associated bank loan loss provisions for credit losses.

For example, you can see our communications and information processing expenses increased 13% year-over-year, as we continue to make critical investment in technologies. We would expect the year-over-year growth for this line item to be right around this level for the full-year in fiscal 2022.

Slide 12 shows the pretax margin trend over the past five quarters. While our pre-tax margin target in this near zero short-term interest rate environment is around 16%, we generated a pre-tax margin of 20.1% in the fiscal first quarter or 20.3% on an adjusted basis, boosted by record revenues particularly for investment banking, still relatively subdued business development expenses and a loan loss release during the quarter.

We will probably have to revisit our pre-tax margin and compensation ratio targets at our Analyst and Investor Day scheduled in May, if we start seeing increases in short-term interest rate. Hopefully by then, we will also have more clarity on other important variables such as the outlook for investment banking revenues, the level of business development expenses, travel and conferences resume more fully and the impact of recently closed and pending acquisition.

On slide 13, at the end of the quarter, total assets were approximately $68.5 billion, an 11% sequential increase reflecting solid growth of loans at Raymond James Bank, as well as a substantial increase in client cash balances that we're accommodating on the balance sheet.

Liquidity and capital remained very strong. RJF corporate cash at the parent ended the quarter at $1.4 billion, increasing 21% during the quarter. The total capital ratio of 26.9% and a Tier 1 leverage ratio of 12.1% both more than double the regulatory requirements to be well capitalized, providing significant flexibility to continue being opportunistic and grow the business.

Slide 14 provides a summary of our capital actions over the past five quarters. In December, the Board of Directors increased the quarterly dividend 31% to $0.34 per share per quarter which is not reflected on this chart until next quarter. The Board also authorized share repurchases of up to $1 billion, which replaced the previous authorization. As of January 25th, 2022, all $1 billion remained available under this authorization.

Due to regulatory restrictions following our pending acquisition of TriState Capital Holdings, we do not expect to repurchase common shares until after closing, but we believe this authorization signals our intention to repurchase the associated shares soon after closing. In the meantime, we expect our capital and our share count to continue growing between now and closing.

Lastly, on slide 15, we provide key credit metrics for Raymond James Bank. The credit quality of the bank's loan portfolio remains healthy, with most trends continuing to improve. Criticized loans declined and non-performing assets remained low at just 19 basis points. The bank loan loss reserve release of $11 million was primarily driven by improving macroeconomic assumptions used in the CECL models.

The bank loan allowance for credit losses as a percentage of loans held for investment declined from 1.27% in the preceding quarter to 1.18% at quarter-end. For corporate portfolios, these allowances are higher at around 2.13%.

Now, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Thank you, Paul. Overall, I'm extremely pleased with our strong start to fiscal 2022. We are well positioned entering the second fiscal quarter with strong capital ratios, records for all our key business metrics, including client assets, client domestic cash sweep balances and strong activity level for the financial adviser recruiting and investment banking. In the Private Client Group segment, results will benefit by starting the fiscal second quarter with an 8% sequential increase of assets and fee-based account, which would result in a 5% to 6% increase in asset management fees, given two fewer days in the second quarter.

Additionally, based on our robust recruiting pipelines, we hope to continue our recruiting trend as perspective advisors are attracted to our client focused values in leading technology platforms. I can't promise we'll be able to sustain the 11% net new asset growth we achieved over the last 12 months or the phenomenal 14% annualized net new assets we experienced in the fiscal first quarter, but given our strong retention and continued interest in all of our affiliation options, I'm optimistic we will continue delivering leading organic growth numbers.

In the Capital Market segment, the investment banking pipeline remains very strong for the next quarter or two, but given all the uncertainties in the market, we really don't have much visibility for the second half of the year at this point. We do know we have a much stronger team than we had five years ago and we have gained market share. So our productive capacity has certainly grown.

But what I can't tell you is what will happen to the markets and activity levels across the industry 6 to 12 months from now. We also expect solid fixed income brokerage results over the next quarter or two driven by demand from depository client segment, which is still flushed with cash and searching for yield optimization opportunities that we do a fantastic job in helping our clients.

In the asset management segment, if equity markets remain resilient, we expect results will be positively impacted by the higher financial assets under management, which continues to be driven by the strong growth of assets and fee based accounts in the private client group segment. And Raymond James Bank should continue to grow as we'll have ample funding and capital to grow the balance sheet.

We will continue to focus on lending to the private client group segment through securities based loans and mortgages and we will remain selective and deliberate in growing our corporate loan portfolio. Also as previously mentioned, we should experience significant tailwinds in a rising interest rate environment. Finally, I want to thank all our advisors and our associates for their perseverance and dedication to providing excellent service to their clients. These results are a testament to their hard work and everyone in the Raymond James family.

With that operator, will you please open up the line for questions?

Questions and Answers

Operator

Thank you. [Operator Instructions] And the first question comes from the line of Manan Gosalia with Morgan Stanley. Please proceed.

Manan Gosalia
Analyst at Morgan Stanley

Hi, good morning.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Good morning.

Paul Shoukry
Chief Financial Officer at Raymond James

Good morning.

Manan Gosalia
Analyst at Morgan Stanley

So, I was wondering if you can unpack your comments on the net interest income and the sensitivity to higher rates. I know you said $570 million addition to pre-tax income, 65% NII, 35% account and service fees, but does that assume a flat balance sheet and CIP balance is staying flat and also third-party deposits staying flat? Or is there a basically more upside to these numbers given the loan growth that you're generating and also the upcoming acquisition of TriState?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

No, you're absolutely right, that is a static analysis based on current balances. And so we do have upside going forward as we continue growing the balance sheet at Raymond James Bank and also as we hopefully close the TriState capital acquisition. So we have some good tailwinds in a rising rate environment.

Manan Gosalia
Analyst at Morgan Stanley

Got it. So then maybe I can push you a little bit on your pre-tax margin comments. I know you're not giving any targets right now, but maybe you can help us think through it. So if I look at your quarter right now, you're running at a 20% pre-tax margin. If I normalize for provisions and business development costs, maybe you get to 19%. And then if Capital Markets revenue is elevated, maybe that gets you down to 18% when those normalize and your comments of 570 million if I'm doing the math right suggest there is 3 to 4 percentage points upside to the margin. So should we expect that as we get through this rate cycle, your margin can go up to 21%, 22% in the cycle?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

I mean, we're not ready to come out with a new target at this juncture, but because as you point out, there are a lot of moving parts, but you are correct that the $570 million on today's revenues would equate to somewhere around 300 basis points to 400 basis points of benefit, but I think some of the other factors that we have to consider is sort of normalized business development, what capital markets revenues look like going forward.

So there are some other puts and takes and variables to consider as we get more clarity. But with that being said, if you look at where we were in the last rate cycle, we had higher pre-tax margin target before rates were cut to zero and so we obviously have upside and tailwinds from higher rates.

Manan Gosalia
Analyst at Morgan Stanley

Got it. Thank you.

Operator

And our next question comes from the line of Steven Chubak with Wolfe Research. Please proceed.

Steven Chubak
Analyst at Wolfe Research

Good morning, Paul and Paul. You guys are doing well.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Thanks, Steve.

Steven Chubak
Analyst at Wolfe Research

So I wanted to start off with just a question on TriState Capital. At the time of the merger, you had guided, Paul, to about 8% accretion from the deal and memory serves that only assume two rate hikes through 2024, that assumption certainly feels conservative given the forward curve reflecting close to eight hikes exiting 2023. And I was hoping you could just provide some updated expectations for TSE accretion or the incremental sensitivity if we do get additional rate hikes?

And then just speak to your philosophy around how much of that NII windfall from higher rates would you expect to fall to the bottom line versus get reinvested in the business?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Yeah, I mean as far as the synergy guidance that we provided upon announcement if my memory serves me correct, I think it was 8% accretion, not really factoring in any rate hikes at all and then maybe an additional 300 basis points to 400 basis points with the rate projections that you just mentioned. So to your point, rate increases are looked like they're coming faster than we anticipated at that point in time. So to the extent they have a floating, highly floating rate balance sheet locked in securities based loan, 65% of their loans are in securities based loans that are floating. And so to your point, there is more upside if rates increase faster than we originally anticipated.

Steven Chubak
Analyst at Wolfe Research

Okay. That's great color, Paul. Just for my follow-up and merely a bit of a pointed question on organic growth. Your headline organic growth is the highest of any of the public companies that reported so far, it's coming in at an impressive 11% trailing 12-months, 14% annualized in the quarter. At the same time, the reported AUM when we go through the benchmarking exercise, the growth of 7% quarter-on-quarter is virtually identical to peers that are growing at half your stated organic growth rate.

And just it also appears a little bit light relative to the gains that we saw in the S&P of about 10% in the quarter. And I was hoping you could just speak to the stronger organic growth, why it's not necessarily translating into a higher level of AUM growth granted one quarter does not a trend make and any differences you're just aware of in terms of how you run the organic growth calculation, relative to what some of your peers might be doing?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Yeah, as far as we can tell, Steve, we're calculating -- most of the peers are calculating the organic growth calculation similarly, we track that pretty closely. So we have been generating as you said, bleeding organic growth, if you look at our net new asset metrics. And if you look at our asset growth overtime, which we've been saying for a very long time even before we started producing net new assets, our asset growth is the best in the industry as well.

And as you point out those two are correlated. So from quarter-to-quarter, sometimes it's hard to tell, but if you look at it over 1, 3, 5 year period or any period of time, our asset growth on organic basis has been leading in the industry. Sometimes you have to factor in acquisitions or big program hires or something like this, but certainly the net new asset and the asset growth has been amongst the best and then certain quarters the best, certain years the best in the industry.

Steven Chubak
Analyst at Wolfe Research

It's great color, Paul. Thanks so much for taking my questions.

Operator

And our next question comes from the line of Devin Ryan with JMP Securities. Please proceed.

Devin Ryan
Analyst at JMP Securities

Thanks. Good morning, guys.

Paul Shoukry
Chief Financial Officer at Raymond James

Hey, Devin.

Devin Ryan
Analyst at JMP Securities

I want to come back on the interest rate outlook and some of the moving parts here. If we look at the cash balances, you saw a really nice step up in the quarter and big spike in December as well. I'm just curious, was that just kind of year-end selling or was it because of the strong M&A or some seasonality, I know there can sometimes be seasonality in there. So really just trying to understand like how sticky you think that kind of step function hire was in the quarter?

And then also in terms of the positive betas, you obviously -- we have some good recent history of how things trended and it was quite a bit better than I think expectations heading into the prior tightening cycle. How are you guys thinking about maybe competitive threats or just competitive dynamics with FinTech being a lot larger today than it was four or five years ago and many of those firms are kind of signaling that they're going to pass the majority of the benefit through to customers, does that play in or do you not look at them necessarily as direct competitors when you're thinking about cash and deposit rates?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

A good question, Devin, I think there's a few things. First, you have to remember, client cash is only 6.5% of assets. So it's not a high percentage. Typically for most periods, we're closer to 10. So clients are still pretty invested. So part of that with the market growth, obviously, the equities grow versus the cash. So the client cash has been very sticky in terms of the portfolio, certainly not over weighted. But also because of our recruiting, we bring a lot of cash in when people move over, their clients are allocated somewhere 5% to 10% cash. So that continues to grow and our recruiting is just doing great, we're still full guns on it.

So I think that's -- we're pretty comfortable with that cash, I think it's almost the opposite. If there is a correction during this interest rate period, we see a lot more cash generated, but we haven't seen any unusual movements. And so that's a percent of assets still pretty low, probably driven more with us by just our success in recruiting.

Paul Shoukry
Chief Financial Officer at Raymond James

As far as your deposit rate question, there are more FinTechs now than there were three years ago, but there were a lot of high yield accounts available online three years ago as well. So maybe offsetting factor is that, unlike the last rate cycle, the banking system is extremely flushed with cash now maybe more so, well, definitely more so than it was in the last rate cycle.

So there's some puts and takes. We are assuming in our $570 million pre-tax upside, 15% deposit beta which is commensurate with what we saw in the last rate cycle. We think that's a conservative, but it could be lower or higher than that for the first 100 basis points depending on those factors.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

We find clients too typically during these end crisis, if we go through history, it's got to be over 1% face rate before they even start looking at it. So we have a long way to go from 1 basis point certainly in the early going. FinTechs can offer 1, but there's not really many push to park them very liquidly at that rate. So I don't think -- I think the first 100 basis points is a pretty safe assumption probably conservative given the history on the first 100 basis points. And after that as rates go higher than there is, the game is on, but I think the early raises is pretty safe assumption.

Devin Ryan
Analyst at JMP Securities

Okay, terrific. That all makes sense. So just a follow-up here. With Charles Stanley closed, maybe if you can just talk a little bit more about plans to accelerate growth and investments in kind of the U.K. wealth management platform. I know it's still very small, but how we should just think about kind of the trajectory there and maybe your enthusiasm for the potential for additional growth outside of the US?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Yeah, so I think that, it's just closed a few days now. So we're just really starting to talk about integration and that takes some time, but it's a great franchise, if it was constrained, it was constrained by capital a little bit, family controlled and for a good reason, they didn't want to dilute their position where they were. So I think those are off because we have plenty of capital to fuel it. And generally, when people join you, the first thing we always focus on is retention and we've had pretty good track record, I think it will be very positive there too and we need to get everybody settle down in the seat positive of the story.

I will tell you that of all the ones we've ever done and we have tried to stay still pending, but who has a great cultural fit, this is the -- we're hearing very little noise from the advisors, they think it makes sense and they think it's good for them we will invest. We do have some technology they can use some of the other things, so it's going to take a good year or so to really get through that integration.

But we would expect where we have one of the leading growth firms in the UK with RJIS, our independent, we think that we can really step up the growth as is Charles Stanley management with the capital and the ability to recruit in the story. So we're confident, but I wouldn't expect anything significant this year.

Devin Ryan
Analyst at JMP Securities

Okay, great. If I can just squeeze one more in here just on the administrative and incentive comp kind of trajectory. How should we think about that relative to revenue growth across the business, meaning is there some leverage there or is revenues potentially continue to accelerate that that will track ahead just trying to think about some of the puts and takes there?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Devin, as you know, we are always focused on trying to realize operating leverage in the business and growing revenues faster than expenses. And there's always noise quarter-to-quarter, especially when you're comparing a fiscal year end quarter with the beginning of a fiscal year on a linked basis.

But if you step back in fiscal 2021, in the PCG business, we grew the administrative and incentive comp by 5%, with revenues in that business growing 19%. So that was really significant operating leverage and that's kind of continuing in this quarter with 25% year-over-year growth in revenues versus 14% year-over-year growth in administrative compensation expense. So to your point, we have always been focused and we're still focused on realizing that operating leverage as revenue grows.

Devin Ryan
Analyst at JMP Securities

Okay, terrific. Thank you, guys.

Operator

And our next question comes from the line of Jim Mitchell with Seaport Research. Please go ahead.

Jim Mitchell
Analyst at Seaport Research Partners

Hey, good morning, guys. Maybe just follow-up on the compensation question for the -- if I look at FA payouts as a percent of compensable revenue, seems like it went up year-over-year, I know that can move around, but just is there any kind of pressure on compensation given just competition or salary wage inflation or is that just bouncing around, but it does seem like it went up about 90 basis points year-over-year.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Yeah, the financial advisor payouts are on a grid and so in the employee channel and both in the independent contractor channel. So as you noted, that does tend to bounce around 25 basis points, 50 basis points from any quarter, when you're comparing it on a quarter-to-quarter basis. There are benefits that are accrued in there and other things, it's not just direct payout that you would see on the grid. So it can bounce around from quarter-to-quarter, but we're not expecting meaningful step up based on the mix of advisors we have in our independent and employee channel.

Paul Shoukry
Chief Financial Officer at Raymond James

We have not changed really, we haven't raised the payouts and there are higher payouts and higher production for some. So you get a little bit of that impact, but it's really I think just more of a bouncing around effects than it is any change here.

Jim Mitchell
Analyst at Seaport Research Partners

Okay, so no change in the grid?. Okay, that's helpful. And just maybe on the TSC deal, as you get closer to it, do you feel like there's an opportunity to really invest to expand that more rapidly? Should we expect some investment spending around that business or is it really just hey, standalone, we think they can grow with just a little more incremental capital, don't need a ton of investment spend?

Paul Shoukry
Chief Financial Officer at Raymond James

I think there -- if you look at their own releases, we don't, we're still in the middle of a shareholder pride, they had a very, very good, they had very good growth. And I think what you'll see is us just giving them a little more capital and maybe to accelerate technology and to help serve their clients and we may get some synergies over time on compliance on those kinds of functions, but outside of that, we'll be operating alone, they will have little more capital and their growth rates are very good, were kind of very historically and their current release was very, very good. So we certainly don't need them growing faster than they are, I mean, they're growing well and I think it's going to be more of our balance sheet deployment, the use of our cash and they're going to do their thing and serve their clients. So...

Jim Mitchell
Analyst at Seaport Research Partners

Okay, great. Thank you.

Operator

And our next question comes from the line of Bill Katz with Citigroup. Please proceed.

Bill Katz
Analyst at Smith Barney Citigroup

Hey, thank you very much for taking my questions this morning. So just picking up on TSE, so appreciate the upside with high rates, but and they did have a strong fourth quarter if we could tell as well. How does the fourth quarter trend relative to your baseline accretion of 8% as you sort of think about when this closes. Any update on when you think the deal itself may close?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

We kind of gave you some assumptions when we announced the transaction, we use conservative assumptions when we do any kind of investment or make any kind of investment and certainly the level of growth that they achieved in the fourth quarter, again they are separate public company, so I don't want to speak about their results. But to your point, I don't think you would call those conservative, they've been generating really strong growth. And so I'll just leave at that.

In terms of timing, it's all contingent on regulatory approvals and so we hope to get it done in calendar 2022, but again that's that's dependent on the regulatory approvals and right now better shareholder as of end of February.

Bill Katz
Analyst at Smith Barney Citigroup

Okay, great. Just a follow-up, coming back to business development for a moment. Any update and how you're thinking about sort of the glide path in fiscal '22 and so that endpoint number of $200 million sort of exit this year relative to the way you sort of guided to last quarter. Thank you.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

Yeah, I wanted to say the $200 million was a guide or just a reference point for where we were pre-COVID, that would have been $50 million a quarter. We are right around $35 million this quarter and we actually were able to have an adviser conference this quarter for the employee channel. So I would very surprised most of the things here in the second quarter we postponed and push back, unfortunately due to the COVID spread. I would be very surprised if we are able to even exit the year at $50 million run rate per quarter unfortunately. And I say unfortunately because we really do want to get back to travelling again, to having the adviser recognition to enter in the conferences, so I think that's kind of the glide path is probably a longer, a flat or glide path that we though this time last quarter unfortunately.

Bill Katz
Analyst at Smith Barney Citigroup

Okay. Thank you very much taking the questions.

Operator

And our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed.

Alex Blostein
Analyst at The Goldman Sachs Group

Thanks, guys. Good morning, guys. Just may be picking up on that last point, you guys generating fantastic organic growth for this quarter over the last 12 months and that's really without spending a lot on things like conferences and your promotional expense to your point, Paul, it has been running well below where you guys were back in 2019. So, lessons learned from the pandemic being, you guys can still achieve significant growth without spending as much, why is that not the right passage from sort of here?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

There is certainly lessons learned, I mean we were going to a flexible work environment before the pandemic. So, certain lessons were kind of reinforced we could do it, but we think it's important to get people back in the office and we're making great progress, but obviously with the holidays and since we think conservative as the cases have been up. But the big part of lot of those conferences, people think they're just kind of fun trips, they're very educational. The advisors get a lot of training and develop a lot of it on courses that they do and it's important culturally.

So I think advisors understand why we've had to cancel or cut back on it during the pandemic, but they wouldn't understand with things going back to normal that they would just disappear. So, we certainly have learned -- you can do a lot of things with less travel. There's lot of things that require that face-to face-input. And frankly we all know it from our own firms, there is a lot of -- people are tired of not being together and not seeing each other and interacting, even though they like the flexibility, so we got to find that balance. The conferences are important culturally, they're important to get people together, it keeps their bond with the firm and for training development, I mean, there's a lot of facets and they do cost money. But just as the investor conferences, many people on this firm will start back up post COVID, some have been able to sneak some in, but you do them for the same reason and so will we.

Alex Blostein
Analyst at The Goldman Sachs Group

Got it. All right makes sense. My second one is really just a follow-up on, I'm sorry, if I missed that, I think Steve asked the question around just the kind of assumptions around reinvestment spend on the back of the higher rates and the tailwinds you guys are going to get from obviously, materially higher revenues in the backup, higher interest rate. So should we think about any acceleration in investments and in things outside of comp as rates go higher?

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

We don't have anything planned, I mean we're going to, we'll have the same pressures on technology and what are we going to spend. We're going to have as we grow, support will have to grow. We're spending a lot of time automating the back office. So there are things that cost money. There's been comp pressure in the industry, we haven't -- I don't think felt it is, we've felt it, but it hasn't been as great as lot of other people have said it's been or people leaving, our turnover hasn't up very much.

And again I think that's culturally and we paid people well off a good year. So I don't see any big initiatives. I think three or four years ago, we had a huge initiative to kind of redo the whole compliance infrastructure in back office and systems and in gear up, but you're seeing that leverage of that now where those aren't really going up commensurate with revenue. So we don't have any major plans, I don't know what would change over the next three or four years. I'm sure there will be investment initiatives, but nothing like we had three or four years ago.

Alex Blostein
Analyst at The Goldman Sachs Group

That's right, all right. Thanks very much.

Paul Shoukry
Chief Financial Officer at Raymond James

Thanks, Alex.

Operator

And our next question comes from the line of Kyle Voigt with KBW. Please proceed.

Kyle Voigt
Analyst at KBW

Hi, good morning. Maybe just one on the AFS book, the growth there slowed a bit in the quarter. Just wondering if you could comment on your appetite to re-accelerate the growth there given the recent move we've seen really in the belly of the curve?

Paul Shoukry
Chief Financial Officer at Raymond James

We're keeping an eye on it. We do plan on growing it modestly throughout the year, but we're trying to position ourselves for the increase in short-term rate. So taking four to five years of duration, because not a lot of three to four year paper out there that's available, the Fed is still buying, but to take the four to five years a duration for 1.2%, 1.3% not overly compelling in a rising rate environment.

So we're trying to preserve as much flexibility as possible. We do have a preference for being more exposed to the short end of the curve, the really short end of the curve. And so I think we're being kind of deliberate and patient as we always are.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

And I think also we were -- we debated when we knew rates were falling whether it was the lock in and we thought we'd just better off long term with the floating balance sheet. So now that we see all predictions are raised, rates will rise, you never know it's kind of the wrong time to abandon that if you believe that rates are really going up and you're going to get a bunch of raises in the next year as people are predicting now. So, we are not -- we are investing and growing the securities book, but we're not going to raise to do it because we think within a year, we'll look back and say, gosh, we probably shouldn't have done that.

Kyle Voigt
Analyst at KBW

Understood. And if I can just ask a follow-up earlier to a question that was asked on the administrative compensation in the PCG segment. You mentioned that it only grew 5% last year despite 19% growth in the segment revenue and now we've seen that accelerate to 14% year-over-year growth in the first quarter here. I'm just trying to get a sense of this months and acceleration in this line for the full fiscal year, if there's anything to really know in that line in terms of seasonality in the fiscal first quarter?

And then if you could maybe just give an update in terms like the medium term outlook for that administrative compensation line for PCG, is it right to think about that line as being kind of a mid single digit growth line overtime on a normalized basis, maybe just comment there that'd be great. Thank you.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

There is a lot of factors, a lot of items that go into that line. I mean there's a poor seasonality as there is with most compensation related line items, but one of the factors that goes into it is just accruals or benefits, which are based on profitability growth. So you're going to see growth in that line with the growth in profitability.

And as Paul says, we have been very generous in terms of compensation to our associates. We have a long track record of sharing the success of the firm's with our associates. And with our fiscal year end being in September, this line now reflects the salary and bonus increases that we gave at the end of our fiscal year end. You'll start seeing that probably for most of our peers starting next quarter.

So I think this is -- there's a lot of factors that go into it, but as I said earlier, we're really focused on realizing the operating leverage going forward.

Kyle Voigt
Analyst at KBW

Great. Thank you.

Operator

And the last question comes from the line of Chris Allen with Compass Point. Please proceed.

Chris Allen
Analyst at Compass Point

Hey, good morning, everyone. Looks like my questions have been answered already. I guess just a quick one, just on the client cash balances obviously helped by net new asset growth and will treat most percentages of assets. I'm just wondering typically seasonality there towards the end of the calendar year and any commentary just on shifting the risk appetite from the client perspective to start this year just getting where the markets are?

Paul Shoukry
Chief Financial Officer at Raymond James

Yeah, as Paul said, really the fluctuations in cash balances, the extreme fluctuations really are more dependent on market movements. We have seen some end of calendar year built up of cash over history, over time. And then, of course, as we get to the tax season in April, some of that cash you get to use to pay taxes. But I would say that the growth that we saw this quarter was really due to the fantastic organic growth that Paul was describing earlier.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

I think if you look at client sentiment, I think the most recent has been pretty flat with last quarter that about half are confident in the stock market. Good news is 95% are still confident in their advisory. So, I think there are uncertain times, people aren't going to rush to invest cash versus three or four years ago when you're in the middle of a run, it looks like it's continuing to run, people are more likely to invest.

So I don't see any pressure for that number to really go down, I don't see a rush for them to put money into the equity market. Again, as a percent of assets, it's lower than historical. So I think we're doing well there. So I would expect any fluctuations, you never know, right? So the markets dynamic, but I think we're in good shape.

Chris Allen
Analyst at Compass Point

Thanks, guys.

Paul Reilly
Chairman and Chief Executive Officer at Raymond James

So, I'd like to thank everybody for joining. I believe that not only do we have fantastic quarter, all the indications, recruiting is strong, we have upside on interest rates, our pipelines and investment banking are very strong. It's hard to give, I've been around too long where I see M&A come and go depending on market conditions if you had a really sharp drop in rate or equity markets that certainly can impact it, but in a normal state that's in great shape as long as we continue to first retain our advisors and have them do the great job, they continue to have done this last year and last quarter and our recruiting momentum is extremely strong. The feel is good to start the calendar year where we are. Hopefully, COVID gets through the system and we can have more of a normal life and but it was a good quarter and I think we're well-positioned going forward.

So I appreciate you joining us this morning. Thank you.

Operator

[Operator Closing Remarks]

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